Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest term preferred stock issued by Priority Income Fund. Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.
The New Issue
Before we submerge into our brief analysis, here is a link to the 497 Filing by Priority Income Fund – the prospectus.
For a total of 1M shares issued, the total gross proceeds to the company are $25M. You can find some relevant information about the new preferred stock in the table below:
Priority Income Fund 6.375% Series E Preferred Stock Due 12/31/2024 (NYSE: PRIF-E) pays a cumulative fixed dividend at a rate of 6.375%. The new issue has no Standard & Poor’s rating and is callable as of 10/07/2021, maturing on 12/31/2024. Currently, the new issue trades at a price of $24.80 and has a 6.70% Yield-to-Maturity and a Yield-to-Call of 7.11%.
Here is how the stock’s YTC curve looks like:
The shares of Series E Term Preferred Stock will be senior securities that constitute capital stock. The Series E Term Preferred Stock will rank:
- senior to shares of our common stock in priority of payment of dividends and as to the distribution of assets upon dissolution, liquidation or the winding-up of our affairs;
- equal in priority with the issued and outstanding Series A Term Preferred Stock, Series B Term Preferred Stock, Series C Term Preferred Stock, Series D Term Preferred Stock and all other future series of preferred stock we may issue, as to priority of payment of dividends and as to distributions of assets upon dissolution, liquidation or the winding-up of our affairs; and
- subordinate in right of payment to the holders of any senior indebtedness, of which there currently are none.
Priority Income Fund, Inc. is a closed ended fixed income mutual fund launched by Prospect Capital Management LLC and Behringer Harvard Holdings, LLC. The fund is managed by Priority Senior Secured Income Management, LLC. It invests in the Senior Secured Loans, with an emphasis on current income or pools of senior secured loans known as collateralized loan obligations. The fund invests in the companies whose debt is rated below investment grade. It was previously known as Priority Senior Secured Income Fund, Inc. Priority Income Fund, Inc. is domiciled in United States.
Source: Bloomberg.com | Priority Income Fund
Top 10 Holdings As of June 30, 2019:
Source: Annual Report June 30, 2019
Dividends and Distributions
Capital Stock as of September 25, 2019 (assuming issuance of Series E Term Preferred Stock):
The Priority Income Fund Family
The company has four more outstanding preferred Stocks:
- Priority Income Fund 6.375% Series A Cumulative Term Preferred Stock Due 2025 (RIF.PA)
- Priority Income Fund 6.25% Series B Cumulative Term Preferred Stock Due 2023 (PRIF.PB)
- Priority Income Fund 6.625% Series C Cumulative Term Preferred Stock Due 2024 (PRIF.PC)
- Priority Income Fund 7.00% Series D Cumulative Term Preferred Stock Due 2029 (PRIF.PD)
The other four preferred stocks also pay a cumulative fixed dividend, at a rate of 6.375%, 6.25%, 6.625%, and 7.00%. They all have very close call dates, which occur within 15 months one after another. As regards to the maturity, the dates are slightly more distant and even PRIF-D has a significantly later maturity date.
If we compare the newly issued Series E Term Preferred Stock with the other term preferred stocks, with a Yield-to-Worst of 6.81%, PRIF-E seems to be the best from its “older brothers” by this indicator (6.62% for PRIF-A, 5.94% for PRIF-B, 5.39% for PRIF-C, and 6.34% from PRIF-D). If we look at the Yield-to-Calls and the Yield-to-Worsts of the group separately, PRIF-E has the highest YTC and the second-highest YTM. Only PRIF-D has higher YTM but at the cost of 5 years more to its maturity.
Take a look at the bubble charts, presenting the preferred stocks by their Years-to-Maturity and YTM & Years-to-Call and YTC:
By years-to-maturity and yield-to-maturity
By years-to-call and yield-to-call
In addition, in the following chart, you can see a comparison between the Priority Income Fund’s securities and the fixed income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). What we see is an outperformance of PRIF-B over the benchmark and the rest of the company’s issues, which in turn has a close correlation with PFF. As for PRIF-D, it has too little trading history to give particular importance to the comparison. Please note the fact that these are term securities, maturing at most after 10 years and generally predisposed them to less volatile behavior as long as there is no increase in the credit risk.
The image below contains all baby bonds and term preferred stocks that pay a fixed distribution rate in the ‘Closed-End Fund – Debt’ sector (according to Finviz.com) by their Yield-to-Call and Yield-to-Maturity.
- By Years-to-Maturity and Yield-to-Maturity
The higher the YTM is, the better the bond. Now let’s see, do they carry any call risk.
- By Years-to-Call and Yield-to-Call
If we exclude the negative YTC ones and have a closer look at the main group:
Here is the full list:
Fixed-Rated Term Securities
The next chart contains all preferred stocks and baby bonds that trade on the national exchanges, pay fixed distribution, and have less than 10 years to maturity, with a positive YTC. The baby bonds, issued by Medley Management, MDLQ and MDLX, are excluded, along with AFHBL, where the situation is very severe.
- By Years-to-Maturity and Yield-to-Maturity
- By Yield-to-Call and Yield-to-Maturity
Asset Coverage Ratio
To seek to enhance returns to our common stockholders, we may borrow money from time to time at the discretion of our Adviser within the levels permitted by the 1940 Act (which generally allows us to incur indebtedness so long as our asset coverage ratio is at least 300% after incurring such indebtedness or issue preferred stock so long as our asset coverage ratio is at least 200% after issuing such preferred stock) when the terms and conditions available are favorable to long-term investing and well-aligned with our investment strategy and portfolio composition. In determining whether to borrow money, we will analyze the maturity, covenant package and rate structure of the proposed borrowings as well as the risks of such borrowings compared to our investment outlook. We previously offered shares of our Preferred Stock pursuant to a continuous offering but we are no longer doing so. As of June 30, 2019, we had $37.5 million of shares of Series A Term Preferred Stock, $25 million of shares of Series B Term Preferred Stock, $40.25 million of shares of Series C Term Preferred Stock and $26.1 million of shares of Series D Term Preferred Stock outstanding and our asset coverage ratio was approximately 406%. The Asset Coverage per Unit was $102 as of June 30, 2019. On a pro forma basis, after giving effect to the issuance of 51,740 shares of Series D Term Preferred Stock on July 3, 2019 for proceeds of $1.3 million, our asset coverage as of June 30, 2019 would have been 403%. The Asset Coverage per Unit would have been $101 as of June 30, 2019 with the inclusion of the issuance of 51,740 shares of Series D Term Preferred Stock for proceeds of $1.3 million. On a pro forma basis, after giving effect to the issuance of 51,740 shares of Series D Term Preferred Stock for proceeds of $1.3 million, and the assumed issuance of $25 million of shares of Series E Term Preferred Stock, our asset coverage as of June 30, 2019 would have been 354% and our Asset Coverage per Unit would have been $88 as of June 30, 2019 with the inclusion of 51,740 shares of Series D Term Preferred Stock for proceeds of $1.3 million and $25 million of shares of Series E Term Preferred Stock.
Source: 497 Filing by Priority Income Fund
Use of Proceeds
We intend to use the net proceeds from this offering (after the payment of underwriting discounts and commissions of $781,250 and estimated expenses of the offering of approximately $152,120) to acquire investments in accordance with our investment objective and strategies described in this prospectus and for general working capital purposes.
Source: 497 Filing by Priority Income Fund
Addition To The iShares Preferred And Income Securities ETF
With the current market capitalization of only $25M, PRIF-E cannot be an addition to the iShares Preferred and Income Securities ETF, which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about the last year rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, PRIF-E is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.
PRIF-E has an advantage when compared to the other preferred stocks in the family as it has the highest YTW and the second-best YTM. The company MCAP/(debt + preferred stock) ratio is 1.04, the capital stock of $160M with preferred stocks outstanding of $154M (including the Series E Preferred Stock). However, it must be taken into account that the company is private and although the asset coverage protection, it is hard for monitoring. The preferred stock family is low liquidity and it will be impossible to react if necessary.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.